Investment Idea

The OMXS30 reaches key technical resistance

13/03/2018 | 2 min read

The OMXS30 advanced last week, breaking through a number of shorter-term obstructions to reach the longer-term resistance area around 1580-1600. The longer-term trend and the advance/decline volume pattern remain negative, however, which may undermine the OMXS30’s ability to power through the resistance around 1600 on rising volume. A break of the proximate support levels around 1586, 1580 and 1570 would be counterproductive from a technical standpoint. Failure to hold the key support around 1524-1488 would qualify as decidedly bearish.

The Stockholm market rebounded sharply last week, albeit on lacklustre trading volume. The large cap OMXS30 Index posted an impressive +4.1% gain, ending the week at 1589,62. Thus, the index is back above zero at +0.8% for the year.

Last week’s rally gathered pace when fears of an all-out trade war abated. Most traders appear to have written off President Trump’s steel & aluminium tariff gambit as negotiating tactic ahead of international trade talks. But a degree of uncertainty looms as international trade conflicts are notoriously unpredictable.

The risk of a trade war swung to and fro last week. Negative developments included the resignation of Trump’s chief economic advisor, Gary Cohn [considered the administration’s strongest free trade proponent,] and the EU’s announcement of retaliatory measures in the event that the US were to implement proposed steel & aluminium tariffs.

The White House subsequently announced certain exemptions for Mexico and Canada, which spread optimism in the markets that similar treatment may be in store for the EU.

The week ended on a positive note when Friday’s US payroll data revealed buoyant jobs growth but lower than expected salary increases. Thus, the US markets also closed higher. It is worth mentioning that the rallies in Sweden and the US occurred on lower volume than the recent declines, however. This typically reflects buying on the part of short-term traders, who are far less committed to their positions and can change sides at any time. An influx of net buying pressure of well-capitalised longer-term investors is required to fuel a sustained rally.

The OMXS30’s long-term trend is down as measured in terms of its 40-week and 200-day moving averages. The index has also broken key support around 1573-1584 and the rising trend line in the weekly chart below.

Weekly chart of the OMXS30                                                source: Infront

From a technical standpoint, last week’s rally resembles a sharp correction against the prevailing trend. Many a prudent investor will have used the bounce to reduce their equity exposure.

To post further gains, the OMXS30 needs to break above the technical resistance around 1600 and 200-day moving average around 1604 [at time of going to print] in conjunction with rising volume. Failure to do so would carry with it a risk that price action will retest the key support around 1488. The technical outlook would turn quite bearish if this level fails to hold.

The more detailed daily chart below shows the bounce from 1524 to 1595 on the back of last week’s positive news.

Daily chart of the OMXS30                              source: Infront

As mentioned, the modest volume suggests that this was a counter-trend correction. It is also worth noting that the move lost steam around 1580-1600, where price action has failed to follow through several times before.

If the OMXS30 finally does manage to break through, solid resistance around 1620 threatens to repel any rallies that aren’t underpinned by adequate buying pressure.

The key support areas around 1524 and 1488 are equally visible on the daily chart.

The Stochastic indicator is approaching high values. It could become technically overbought if the index trades up for a few more days.

The hourly chart below shows the resistance levels around 1535, 1547 and 1570 broken by last week’s rally. The hourly resistance level around 1595 restrained price action so far. A break of this area would be technically bullish on an intra-day basis.

Hourly chart of the OMXS30                              source: Infront

Conversely, the intra-day outlook would deteriorate if the OMXS30 breaks below support around 1586, 1580 and 1570.

Short-term bulls will be observing price action around 1595 and the OMXS30’s ability to advance past 1600-1604. Short-term bears will be watching price action between 1586-1580 and any moves that manage to breach support around 1570.

Given the technically negative trend characteristics, longer-term investors should remain risk averse until the advance/decline volume pattern has improved.


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